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General Motors Faces Tough Situation With 1 Critical Catalyst

By Daniel Miller - Mar 8, 2016 at 2:32PM

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A booming Cadillac brand would be a huge plus for GM investors. But it'll be a long, uphill drive for the domestic luxury brand to reach the status of some of its foreign rivals.

Cadillac's first-ever XT5 crossover. Image source: General Motors. 

Investors who are savvy about the automotive industry understand the growing importance of having not just a successful luxury lineup, but a globally successful luxury marque. The key statistic is worth repeating: Luxury vehicles generate 10% of global industry sales, yet produce roughly one-third of industry profits.

General Motors' (GM -1.59%) Cadillac lineup hasn't quite lived up to expectations yet in its attempt to compete with leading European luxury brands, but it remains a potential catalyst if GM can improve the brand's image and sales figures. However, when you look at the current situation, it might be easier said than done.

Competitive advantage
Compared to crosstown rival Ford Motor Co. (F -2.46%), with its struggling Lincoln brand, Cadillac offers GM investors a small competitive advantage. Lincoln has thus far only taken baby steps in its turnaround story after sales declined to a 32-year low in 2013. Last year marked the first since 2008 that Lincoln's sales topped 100,000, and it was the first time since 1998 that the brand logged two consecutive years of sales gains.

If all goes well -- and that's far from guaranteed -- Lincoln hopes to sell 300,000 units across the globe annually by the end of 2020. That's years behind Cadillac, which sold nearly 278,000 units globally last year.

Furthermore, just last month J.D. Power announced that the average transaction price for a new Cadillac topped $55,000 in the U.S. -- the highest among full-line luxury brands. However, Cadillac is in a less-than-enviable position compared to its European counterparts.

Part of the problem facing Cadillac is that GM's umbrella of brands makes its retail footprint far different than those of European automakers. Looking at the U.S. market, Cadillac has more than 920 stores, which is roughly triple the size of Mercedes' or BMW's network -- and Cadillac sells about half the volume of those two brands. Cadillac's sprawling footprint is partly due to dual Chevrolet-Cadillac or Buick-GMC dealerships that also sell a small number of Cadillac vehicles annually.

Even worse, at a time when GM is trying to elevate its Cadillac brand image, dealerships making the vast majority of their profits from Chevrolet trucks and SUVs are less willing to invest the time, effort, or resources to promote the Cadillac brand.

One way GM is trying to change its retail strategy is through virtual showrooms. Cadillac President Johan de Nysschen believes they're a critical step in the overall turnaround plan for the marque. Cadillac is hoping that roughly 400 of its lowest-volume-selling dealerships in the U.S. market will voluntarily remove the luxury vehicles from their lots, and instead order from regional inventory centers when a sale is completed. Those same stores would complete the sales using a "concierge-style" approach, where salespeople would visit prospective buyers at their homes or workplaces with a tablet or touchscreen tool to show off the vehicles.

Will virtual showrooms work?
Raise your hand if you're skeptical. Yeah, me too. And so was Byron Hansen, a dealership owner in Utah, when speaking with Automotive News.

"How does having fewer Cadillacs on display at dealerships in all of these communities help sales?" asked Hansen, whose dealership sold about 30 Cadillacs last year. "It makes you wonder what they're trying to accomplish."

To me, it doesn't appear that virtual showrooms are likely to be the solution to Cadillac's retail presence issue in the U.S. market. And while Cadillac is already a competitive advantage for Detroit's largest automaker versus rival Ford, it remains an underrated catalyst among investors. The brand could certainly move the needle on margins and bottom-line profits if it can eventually achieve the presence of European luxury brands.

With Cadillac looking for ways to narrow the gap with those European brands, GM shareholders should keep an eye on its upcoming vehicle launches and hope for critical acclaim and sales success. Cadillac is launching the CT6 sedan this quarter, followed by the first-ever XT5 luxury crossover, which is aimed at a very fast-selling segment.

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